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State Council encourages more entrepreneurial activity and vows to cut red tape for new firms

The mainland will promote greater use of equity crowdfunding for start-ups to encourage entrepreneurship in the world’s second-largest economy, a cabinet document said at the weekend.

The government has repeatedly said it wants to promote more entrepreneurial activity in the state-dominated economy to stimulate employment, a top priority as the economy slows.

While leaders have pledged strong support for online business, however, they have until now generally refrained from showing enthusiastic support for crowdfunding.

A State Council document posted on the central government’s website called for expanding equity crowdfunding projects to help small companies raise funds as a “useful complement” to traditional equity financing while underlining the need to protect investors’ rights and minimise financial risks.

The document said financial support, including taxation incentives, should be provided to support crowdfunding.

Yingda Securities chief economist Li Daxiao said he believed the document, approved by Premier Li Keqiang, was aimed at facilitating the economy’s transition from traditional labour intensive mass production to one based more on innovations, as well as creating employment through the starting up of new ventures.

The cabinet document gave no details about how to address risks but promised the government would grant easier market access to start-ups by cutting red tape.

It also called for the development of third-party credit rating services and a standardised system for collecting, evaluating and sharing credit information.

Yingda Securities’ Li said that was a key component of risk management for the successful development of crowdfunding.

According to state-run china-news.com, “crowd business venture starts-up” and “crowd innovation” were among the most mentioned phrases by Premier Li Keqiang during visits to various sites in Henan province late last week and in Liaoning province earlier this month.

Traditional financing no longer suits the development of new businesses

It would also play a small role in helping to stabilise the mainland’s decelerating economic growth, by boosting private sector growth, he added.

“The traditional financing model, where collateral is required, no longer suits the development of many new businesses today,” he said, adding the document, the first to clearly spell out Beijing’s support for the nascent financing model, would be particularly helpful to private enterprises that had difficulty raising funds from banks.

With most Chinese banks unwilling to fund start-ups, crowdfunding has already seen rapid growth, helped by new platforms set up by e-commerce giants such as JD.com

Crowdfunding is also being used by large firms as funds from traditional channels dry up. Dalian Wanda, China’s largest commercial property developer, said in June it raised five billion yuan (HK$6 billion) from investors online and that it would continue to raise money from the public.

But reports have highlighted some of the risks of the unregulated market. This month, a Beijing business ventures and explained the importance of entrepreneurialism and innovation to China’s economic development. He also visited a small enterprises “incubation” centre there.

In Henan, where he visited a mining machinery producer in Luoyang that has set up 18 technical innovation teams, Li has also called on large enterprises to engage in innovation and new business start-ups.

The China Securities Regulatory Commission said last month that it would soon begin inspecting online equity financing platforms to address risks from illegal activities.

Under draft rules drawn up by the Securities Association last year, equity crowdfunding projects must have no more than 200 investors. Investors must have at least three million yuan in financial assets or 500,000 yuan in annual average income for the previous three years.

The mainland could account for half of the developing world’s crowdfunding by 2025, or US$50 billion, the World Bank said.

“This article appeared in the South China Morning Post print edition as Beijing promotes crowdfunding to support start-ups on 27 Sep 2015.“